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2. Below is a list of five $1,000 par value zero-coupon bonds. Bond Years to Maturity Yield to Maturity A 1 5.00% B 2 6.00%
2. Below is a list of five $1,000 par value zero-coupon bonds. Bond Years to Maturity Yield to Maturity A 1 5.00% B 2 6.00% C 3 7.00% 4 8.00% E 5 9.00% 1) What is the forward 1-year interest rate four years from now? (6 marks) 2) If liquidity premiums are ignored, at what price shall bond C sell for one year from now? (keep two decimals in the final answer) (6 marks) 3) If your investment horizon is three years and you plan to invest in a bond that allows your position free from interest rate risk, which bond would you buy? What risks do you still face in this investment? (6=3+3 marks) 2. Below is a list of five $1,000 par value zero-coupon bonds. Bond Years to Maturity Yield to Maturity A 1 5.00% B 2 6.00% C 3 7.00% 4 8.00% E 5 9.00% 1) What is the forward 1-year interest rate four years from now? (6 marks) 2) If liquidity premiums are ignored, at what price shall bond C sell for one year from now? (keep two decimals in the final answer) (6 marks) 3) If your investment horizon is three years and you plan to invest in a bond that allows your position free from interest rate risk, which bond would you buy? What risks do you still face in this investment? (6=3+3 marks)
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